How David Stockman Got the 2016 Stock Market Wrong

December 2, 2016

SUMMARY:

In this video, I remind you of the need to ignore pundit commentary on the stock market. As an example, I shine a light on David Stockman, former director of the Office of Management and Budget in the Reagan Administration, who got the 2016 stock market entirely wrong, pointing investors to the sidelines during a very profitable year.

Stop following pundits. Stop paying attention to forecasts. Start a plan of rational reaction to beat the market without stress from indecision. To follow others on this better path, subscribe to The Kelly Letter.

COMPLETE TRANSCRIPT:

This year, in 2016, per usual, the pundits have gotten it all wrong.

Now, it’s very important to understand how ineffective forecasting is, so I want to go through how they got this year wrong, and I’m going to focus in particular on one “z-val” — there’s a term I use a lot: zero-validity forecaster.

He’s not alone, but he’s very convenient because he’s been totally wrong this year and keeps reiterating the same mistake.

The one we’re going to look at is David Stockman, who is the former director of the Office of Management and Budget in the Reagan Administration, and now he forecasts the stock market, goes on TV and tells people to do the wrong thing.

And we’re going to go through one way that David has been wrong this year as he’s been in many years, just to use him as an example of why you should ignore these guys.

Alright, on November 3rd, on CNBC Stockman told people to sell everything. Now, November 3rd was the absolute bottom of the recent stock market rally, it was the beginning of the take-off. The worst possible time anybody could have been told to sell stocks is when Stockman went on CNBC and said “sell everything.”

Now let me read to you part of what he said here:

“If Hillary wins it’ll be very bad. If Trump wins, it’ll be worse. … If you have a paralyzed Congress, if you have a Fed out of dry powder, and you have a market that’s basically been chopping for 700 days … the markets are hideously inflated … delusional that the business cycle has ended … there could be a 25% drawdown.”

That’s what he was saying on there at — I have to repeat — the very, very bottom of the recent market cycle. From there it was all up. I mean, the market just absolutely rocketed higher.

On November 25, just over three weeks after that forecast, iShares S&P SmallCap, IJR, one of my favorite small-cap funds, was up 17%. [Up] 17% in three weeks! That’s what David Stockman warned you away from.

Now, at the end of this did Stockman come back and say, “Well, we got that wrong. Turns out, it would have been better to stay in the market.” No, of course not.

[He] comes back on last week, just ahead of [the end of] that three-week wonderful run, says again on CNBC [that] this strong rally is being caused by a “robo machine trying to tag new highs.”

Now, first of all, what does that mean? I guess he’s referring to algo trading or something. But even if so, even if that’s why the market went higher, so what? Don’t you ever think about this?

So what, David? Stocks went up. Those of us who owned stocks did just fine. Why do we care if the reason they went up is a robo trading algorithm, a weather pattern, an election, a political outcome somewhere that’s not the United States, why do we care?

All of these subjects that pundits bring up are just price pressures. Some are up, some are down, nets out to the stock market rising twice as often as it falls over time. Really. Historically, the stock market has gone up two thirds of the time and declined about one third of the time. So the odds are really against these guys from the get-go.

Alright, back to it.

So, he says “sell everything” again. He just totally ignored the runaway stock rally, and he said, now notice bonds have “cratered by nearly $2 trillion worldwide.” Cratered by nearly $2 trillion worldwide. Now doesn’t that sound just horrible? Oh my gosh, $2 trillion. I must be getting killed on my bond funds.

Mmmm?

First of all, hasn’t David, and haven’t any of the other pundits, noticed that stock prices and bond prices tend to move differently? And, you’re supposed to, as an investor — and Stockman presents himself as a professional investor — you’re supposed to allocate accordingly.

So, in other words, when bond prices are dropping — nothing to say about distributions, payments, right, just the prices — are dropping, many times stock prices are rising. And, indeed, that was exactly the case this time! Stocks were roaring higher as bonds went down.

Now, the $2 trillion worldwide makes it sound so horrible, doesn’t it? But let’s look at the real effect. Check it out.

This is the Vanguard Total Bond Market ETF, symbol BND. How much did it go down in November? A whopping … hold your breath … 2.8%. [Just] 2.8%, David! Yeah, wow, that really matches the “$2 trillion meltdown,” doesn’t it?

And, by the way, when bonds were going down 3%, small-cap stocks were going UP 17%. I’ll take that combination! Gee, if that’s what we’re being warned against, count me in! And count you in, too. This is why we’ve got to ignore these guys.

Now, he has, you know, he called this “slaughtered,” right? “They’ve been slaughtered.” And he loves that term, “slaughtered.” Here you go. He’s been saying it for a long time. Look at this.

Back on February 6, Stockman wrote an article [titled “Why The Bulls Will Get Slaughtered”]. This was after stocks crashed in January, and he joined all the other bears in saying, “As goes January, so goes the year.” And so, of course, he tells everybody at the very bottom of the January crash that it’s time to get out. And he said that the thing he was talking about then was the job market being fishy, the jobs report being fishy.

There’s always something. So, it was the election at the beginning of November that he got wrong, it was the jobs market being fishy at the end of the January crash that he got wrong and he joined everybody else saying “As goes January, so goes the year, get out, get out, get out.”

And, then there was the chorus of bears for the Brexit, right? Look at that one. Out came the warnings. More crashing ahead. The UK votes on June 23rd to exit the European Union, and stocks had a quick, very quick, crash. And of course the headlines go up, the images go up, scary, scary, scary. The bears come out, “Get out of stocks. Here we go. The big one we’ve been warning about!”

Wrong. Again, stocks did just fine.

Now, what’s the big picture here? It’s not just about David Stockman. If it’s not him it’s Jim Cramer, it’s Marc Faber, it’s another one. Insert name here. These guys are paraded on TV to keep the traffic coming, giving their dire warnings, make a great headline and then disappear while you languish on the sidelines with no profit if you followed their advice.

Look at the big picture this year.

This is a 2016 chart of the small-cap market. Thanks a lot, bears! Thanks for these warnings. Look at that. They told us the declining January meant a bad year. They told us the Brexit would collapse markets. And then they told us the US election would kill the markets.

Meanwhile, look what happened. Steady march higher. That’s not a chop sideways, that’s a march higher. That’s the wall of worry. That is stocks rising through thick and thin, the way they have always done! The way they’ve always done!

These guys are not new, and stock market behavior is not new, and you need to understand this if you’re going to keep your money on track the way we do around here.

So, ignore the pundits, ignore the z-vals, and stick to what works: rational price reaction in the stock market.

More on that later.

To see the performance of rational reaction the way I do it, please visit my Strategies page.